What is 'Working Capital Management'
Working capital management refers to a company's managerial accounting strategy designed to monitor and utilize the two components of working capital, current assets and current liabilities, to ensure the most financially efficient operation of the company. The primary purpose of working capital management is to make sure the company always maintains sufficient cash flow to meet its shortterm operating costs and shortterm debt obligations.
BREAKING DOWN 'Working Capital Management'
Working capital management commonly involves monitoring cash flow, assets and liabilities through ratio analysis of key elements of operating expenses, including the working capital ratio, collection ratio and the inventory turnover ratio. Efficient working capital management helps with a company's smooth financial operation, and can also help to improve the company's earnings and profitability. Management of working capital includes inventory management and management of accounts receivables and accounts payables.Elements of Working Capital Management
The working capital ratio, calculated as current assets divided by current liabilities, is considered a key indicator of a company's fundamental financial health since it indicates the company's ability to successfully meet all of its shortterm financial obligations. Although numbers vary by industry, a working capital ratio below 1.0 is generally indicative of a company having trouble meeting shortterm obligations, usually due to insufficient cash flow. Working capital ratios of 1.2 to 2.0 are considered desirable, but a ratio higher than 2.0 may indicate a company is not making the most effective use of its assets to increase revenues.
The collection ratio, also known as the average collection period ratio, is a principal measure of how efficiently a company manages its accounts receivables. The collection ratio is calculated as the number of days in an accounting period, such as one month, multiplied by the average amount of outstanding accounts receivables, with that total then divided by the total amount of net credit sales during the accounting period. The collection ratio calculation provides the average number of days it takes a company to receive payment, in other words, to convert sales into cash. The lower a company's collection ratio, the more efficient its cash flow.
The final element of working capital management is inventory management. To operate with maximum efficiency and maintain a comfortably high level of working capital, a company has to carefully balance sufficient inventory on hand to meet customers' needs while avoiding unnecessary inventory that ties up working capital for a long period of time before it is converted into cash. Companies typically measure how efficiently that balance is maintained by monitoring the inventory turnover ratio. The inventory turnover ratio, calculated as revenues divided by inventory cost, reveals how rapidly a company's inventory is being sold and replenished. A relatively low ratio compared to industry peers indicates inventory levels are excessively high, while a relatively high ratio indicates the efficiency of inventory ordering can be improved.

Working Capital
Working capital is a measure of both a company's efficiency and ... 
Working Capital Turnover
A measurement comparing the depletion of working capital to the ... 
Days Working Capital
An accounting and finance term used to describe how many days ... 
Activity Ratios
Accounting ratios that measure a firm's ability to convert different ... 
Efficiency Ratio
Ratios that are typically used to analyze how well a company ... 
Current Ratio
The current ratio is a liquidity ratio measuring a company's ...

Trading
Ratio Analysis
Ratio analysis is the use of quantitative analysis of financial information in a company’s financial statements. The analysis is done by comparing line items in a company’s financial ... 
Markets
Do Your Investments Have ShortTerm Health?
If a company is strong enough to survive tough times, it is more likely to provide longterm value. 
Investing
Understanding Activity Ratios
Activity ratios measure how effectively a business uses its assets. 
Investing
Advantages of Maintaining Low Working Capital
Understand the benefits and advantages of maintaining low working capital as related to liquidity needs, capital allocation and operational efficiency. 
Markets
Dynamic Current Ratio: What It Is And How To Use It
Learn why this ratio may be a good alternative to the current, cash and quick ratios. 
Investing
Calculating Days Working Capital
A company’s days working capital ratio shows how many days it takes to convert working capital into revenue. 
Investing
AR & Inventory Turnover Is Key For These Sectors
Accounts receivable and inventory turnover are two important ratios in the current asset category. We will also discuss the key industries that benefit from a thorough understanding of these ... 
Markets
Explaining Working Capital Turnover
Working capital turnover is a ratio that helps show how efficiently a company is generating revenue per dollar of cash available to spend on operations. 
Investing
5 Basic Financial Ratios And What They Reveal
Understanding financial ratios can help investors pick strong stocks and build wealth. Here are five to know. 
Personal Finance
Working Capital Works
A company's efficiency, financial strength and cashflow health show in its management of working capital.

How can an investor determine the efficiency of a company's working capital management?
Learn how working capital is vital to a company’s survival. Also learn key metrics investors use to assess how efficiently ... Read Answer >> 
Why is working capital management important to a company?
Learn about a company's working capital; good working capital management is essential to maintaining a company's liquidity ... Read Answer >> 
Can working capital be too high?
Learn more about the working capital ratio, and understand how an excessively high ratio can be considered a negative in ... Read Answer >> 
What are the components associated with working capital management?
Learn what the three main components of working capital management are and how each is significant to efficient financial ... Read Answer >> 
What do efficiency ratios measure?
Learn about efficiency ratios, what they measure, how to calculate commonly used efficiency ratios and how to interpret these ... Read Answer >> 
What ratios are most commonly used to judge working capital management?
Learn about the various working capital ratios that investors and analysts consider when evaluating a company's financial ... Read Answer >>